The obvious question — is this deal a bellwether for the parade of primary private credit expected in Q4? Because with growing competition now from the syndicated market, with IQ-EQ taking the syndicated route, and the Kahoot!P2P successfully obtaining a bank underwrite, a little of the territory that private credit has enjoyed until now may already be eroded. 

Gresham House: a case study for how to do a deal

What is interesting about Gresham House is that the lender-friendly terms had to be fought for — but were nonetheless won. If you look at the text around the MFN provision (screenshot below), you can see that the original sunset was a meagre 12-months, but has been amended to 36-months. Likewise, the MFN rate was lowered to 0.75% per annum from 1%.

Likewise, there’s clearly been some back and forth between lender counsels Allen & Overy and Walkers and company counsel Ogier on definitions around permitted indebtedness and the sizes of the baskets concerned:

And the definitions around addbacks to EBITDA have also been tightly controlled. This includes amending the definition of consolidated EBIT, shortening the ‘cost savings’ period from 24-months to 18-months and a requirement for pro forma adjustments to be certified in writing (see below).

These kinds of controls are designed to prevent companies like Gresham House from boosting their EBITDA levels by adding back in costs not strictly relating to interest, taxes, depreciation, and amortisation expenses, along with non-recurring and discretionary expenses. 

Lack of control over EBITDA definitions and adjustments has allowed some businesses to artificially bolster their EBITDA and therefore increase covenant headroom, much to the chagrin of their lending parties.

As well as tighter definitions around EBITDA, the Gresham House deal contains two financial covenants (a leverage ratio and a debt service cover ratio), a two-way margin ratchet (lumping an extra 50 bps on the borrower should the leverage rise to 5x), a floor of 1% and a pre-payment fee of 2%.

As one source put it: it’s a deal “done right.”

The bigger the baggier

Nonetheless, at £174m through the TLB, Gresham House, in private credit terms at least, is not a particularly big deal. 

In May, 9fin pulled some of 2023’s private credit-backed P2Ps into a table for ease of comparison. The take-privates of Hyve, Medica and Sureserve (backed by Hayfin and Deutsche Bank, Barings and Pemberton, respectively), were all sub £200m debt packages covenanted with leverage covenants. However, with the exception of Hyve at 725bps, pricing stayed below a seven handle.

Leverage on these deals ranged from 3.2x to 4.5x. 

As you move to larger private credit underwrites, however, the terms get a little looser. In the £1.25bn TLB backing Dechra’s P2P, (see our legal quicktake here,) there is no maintenance covenant and the floor is 0% for EURIBOR.

So while a public example of strict documents like those of Gresham House should be applauded, it does not necessarily herald a return to tighter documents for private credit across the spectrum. 

As we’ve seen this year, the classic middle market deals have enjoyed stricter documents with at least one covenant. However deals that once would have gone to the syndicated market, like Dechra, have tended to imitate some of those syndicated characteristics, most notably, covenant-lite.

Where there is convergence and competition between the broadly syndicated loans market and the private credit market, there is unlikely to be a return to stricter documents, for now.

Private credit ‘syndification’

On that note, the IQ-EQ deal, which was rumoured to be following a dual-track process, has gone down the syndicated route with private credit left broadly empty-handed (we say broadly because the £268m euro-equivalent tranche due 2023 but extended by three years was privately placed, not clear to whom), following in the footsteps of other dual-track processes that went the syndicated route like Wellspect Healthcare.

At E+475 bps and S+475 bps on the €500m and $520m tranche, respectively, and now, apparently, with availability of financing, syndicated took the edge for IQ-EQ. 

And, after hefty private credit participation in take privates, this week, it emerged that Goldman Sachs Asset Management Private Equity had underwritten its take private of Oslo-listed Kahoot! not with private debt, but with Goldman Sachs’ bank, KKR Corporate Lending and KKR Capital Markets Partners, according to the offer announcement.

Deal terms will be available from 24th July and it will be interesting to see how they compare to the private credit-underwritten take privates. 

But despite the march of the syndication — and despite aforementioned questions over portable financing, UK software business Civica has managed to wrap up its £1bn financing with a private credit club, according to two sources familiar with the situation. The deal comprises a £700m TLB and £300m acquisition facility priced at 625bps. 

Private credit lender ICG has also provided the financing on Inflexion Private Equity’s take private of DWF Group. And, private equity sponsors are readying debt packages of around $200m as they compete to bid for IT services provider Options Technology, according to three sources familiar with the deal. The Abry Partners’-owned business has attracted interest from Cinven and Permira, the sources said, with the third source adding that at least one other sponsor is in the mix.

Two major private credit players, Guggenheim and Blackstone, have provided part of a €300m debt package backing GTCR’s acquisition of supply chain software management firm Once For All, 9fin has additionally reported. The Parisian firm was recently bought up in a carveout from its parent company Fortius, exchanging hands from Warburg Pincus to GTCR.

Smart mobility leader Nomadia has been acquired by HG Capital, Fremman Capital, a London-based private equity firm, acquired Medinet, a recruitment agency for NHS staff and Kartesia has provided the debt facilities supporting Cornerstone Investment Management’s acquisition of European business Ecowipes. 

Elsewhere in the market, investor appetite continues for Asian private credit. Muzinich & Co has now announced the final close of its Muzinich Asia Pacific Private Debt I Fund at $500m (it’s also announced the first close of its Muzinich Pan European Private Debt III Fund at €132m), while Bloomberg has reported a Japan private credit offering.